Is a 2% (or even 1.5%) Rule SMF in Worcester too much to ask for?

22 Replies

My wife and I have been researching and visiting small multi-family properties in the Worcester, MA area. We're finding opportunities in the lower income areas but it seems most, if not all, barely meet the 1% rule... leaving very little wiggle room to reach positive cash flow. Not to mention the majority will require some updating and rehab.

Is that something to be expected in this area or are we not finding the right properties?

We are interested in connecting with multi-family investors in Worcester - coffee is on me. Love to pick your brain about the Worcester market and any advice or suggestions you might have for new investors. Please let me know!

A lot of buyers from Boston and NY have been coming in and driving prices up, some of them paying questionably high prices for places that are in or are adjacent to warzones. The influx of out of town/state buyers has actually created talks of a multifamily rental registry which will of course come with a fee. I may be erring on the pessimistic side but I think the days of above 1% are drawing down until perhaps another market correction or rent increases swing sharply up to compensate. As someone local looking for my first I feel your pain man!

Cameron nailed it. Multi prices went from stupid to insane over the last two years. The only people I know getting the 2% rule are buying off market gut jobs in cash with quick closing then dumping a ton more cash into the rehab before getting their cash back out. All of the MLS listings I see barely break even and are going to have to hope for appreciation. I personally don't think it will be worth touching the city until the next serious down turn unless you have $500k or more in cash that you can tie up for 6-12 months

Just wanted to chime in, I've been looking over a good portion of MA and haven't found many places that hit the 2% rule. 

Feel like in Worcester, you'd maybe see ~1%. However as @Steve Bracero was mentioning, a good number of these properties are under rented so even just seeing 1% is tough. Still feel as if Worcester has a lot going for it in terms of cities in MA. Another option might be south coast where prices are cheaper, but rents follow.

Updated almost 2 years ago

Also, the 2% is just a guideline - it doesn't necessarily mean that every deal needs to hit 2%, but you can sure bet that if you're getting 2% in MA, you're doing pretty well for yourself. Underwrite your deals to see what exactly you can squeeze. Be conservative on your numbers regarding expenses. Just because a property might only hit the 1% rule, might not mean it's a terrible deal - just all that is being offered in today's market. Today's market is different than 2008-2010, deals are harder to come by. I'm underwriting my deals to see if I have a comfortable level of cashflow. I know that in today's market it will be damn hard to find a 2%, but that doesn't mean to stop searching for deals!

I figured 2% would be a stretch but I feel a little better knowing it wasn't just me seeing so many >1% listings. Sounds like ~1 and >1% opportunities are what we'll find in the Worcester market - at least on the MLS.

@Cameron D Boyle , Thanks for responding. Yea, we found ourselves in a few of those places right in/off of the warzone areas. Interesting note on the rental registry though. I'll try to be optimistic and keep looking for the diamonds in the rough. 

Thanks, @Bryan Devitt . We planned on this first one being FHA and have considered the FHA 203(k) to get in and rehab but with the high monthly debt service, making the numbers tough to swallow. Fair position on the approach.

Thanks, @Steve Bracero . Noticing quite a few "he does some maintenance for me" rationale around some of the low rents. 

@Phil K. Fair! I don't think we are giving up on Worcester yet but we'll keep the South Coast in mind as well. Thanks!

Originally posted by @Andrew Albert :

My wife and I have been researching and visiting small multi-family properties in the Worcester, MA area. We're finding opportunities in the lower income areas but it seems most, if not all, barely meet the 1% rule... leaving very little wiggle room to reach positive cash flow. Not to mention the majority will require some updating and rehab.

Is that something to be expected in this area or are we not finding the right properties?

We are interested in connecting with multi-family investors in Worcester - coffee is on me. Love to pick your brain about the Worcester market and any advice or suggestions you might have for new investors. Please let me know!

Andrew, it sounds to me like you and I are in a very similar place right now - my wife and I live near Boston now, but are looking to FHA a multi in Worcester and I'm finding a lot of properties that barely cashflow at all, never mind meet any kind of "% rule" - unless the .01% rule is a thing now.

I'd love to grab a cup of coffee sometime and chat with you, compare notes about what we're finding.

I think the problem is that in general this area of MA is highly priced. 3 Family's are average 350+ and really can't rent more than 800-1000 due to a number of factors. I live and own in Worcester, MA area if you need a contact in the area. 2% rule isn't really a thing here at the moment unless you have a way to drive rents up. High class (a-high b) apartments here are renting 1 bedrooms for 1850 + parking fees, pet fees, no utilities. So it really depends on the neighborhood and quality of the building you purchase.

Tip for this area - Don't treat 4 family and below any different than you would a 5 family plus commercial property. CAP rate matters even for small properties here. (even though its not a truly used metric).

@Ryan Severance @Andrew Albert

Do you mind if I ask how much you guys are looking to put down? I've run numbers for 3.5% down, but honestly the number rarely work from the get go. Most properties seem to be somewhat under rented, so have some room to account for with increased rents. I've set my strategy to not utilize the lowest DP possible, I'm most likely going to leverage either a 25% down investment non owner occ, or a 10% down owner occ.

The way I'm looking at an owner occupy, if I were to just go out and rent somewhere else, easily could be $1000+ a month. If you can find a good owner occupy, where you're only out of pocket a few hundred a month, when the year is up and you move out - that property should cashflow some. While I know it would be awesome to have some cashflow while your'e living in the units, I've found that the 3 deckers don't cut it, the 4 units work much better in terms of getting some positive cashflow, while you're living in the property but 4's are hard to come by.

Never hurts to look at the single families either, I've seen a handful of good BRRR candidates. Could owner occ, rent out rooms and get some equity that way as well. I know that it would be an awesome investment to hit a home run on my first deal, however it's important to take action as well.

Originally posted by @Phil K. :

@Ryan Severance @Andrew Albert

Do you mind if I ask how much you guys are looking to put down? I've run numbers for 3.5% down, but honestly the number rarely work from the get go. Most properties seem to be somewhat under rented, so have some room to account for with increased rents. I've set my strategy to not utilize the lowest DP possible, I'm most likely going to leverage either a 25% down investment non owner occ, or a 10% down owner occ.

The way I'm looking at an owner occupy, if I were to just go out and rent somewhere else, easily could be $1000+ a month. If you can find a good owner occupy, where you're only out of pocket a few hundred a month, when the year is up and you move out - that property should cashflow some. While I know it would be awesome to have some cashflow while your'e living in the units, I've found that the 3 deckers don't cut it, the 4 units work much better in terms of getting some positive cashflow, while you're living in the property but 4's are hard to come by.

Never hurts to look at the single families either, I've seen a handful of good BRRR candidates. Could owner occ, rent out rooms and get some equity that way as well. I know that it would be an awesome investment to hit a home run on my first deal, however it's important to take action as well.

 Phil,

My wife and I don't have anything more than 5% down on most of these properties. It is what it is for me.

I want to take action now, before the Worcester market blows itself out of proportion any more to where you can't even get a property that will cashflow period.

Most things I look at barely break even with me in them, but would cashflow at an ok level with me out of them.

As for 4 families, I see very few that are priced at any level that will cashflow - the 4 family owners want the moon for their stuff.

And as far as SFs go and BRRR'ing, I'm not in that market right now as I do not have the time for doing large scale renovations.

I may be later when I have the capital to pay others to do so.

Right now I want a good condition multifamily to hold onto for a long time.

I only plan to live there for a year or two, then move out and either:

A) Depending on the market (and my wallet) in a year or two, I might buy another multi. 
But - this is my dream to own rental property, so that is going to require my wife to be on board with living in another multifamily.

Or

B) buy the single family my wife and I want to live in for a long time and be done with buying multis for at least a little while.

My strategy here is to get a multifamily to buy and hold and have passive income for a long time and yet still get the single family I want later.
I'm not that old (yet), so as long as the multi cashflows at current rental rates, I should be ok.